MORGAN STANLEY: QE As We Know It Is Over

While most of the attention this week has been paid to Greece's
debt restructuring, in reality headlines from the Federal
Reserve, the
European Central Bank, and other central banks--as well as
brand new economic indicators--have ushered in a new era of
cautious or minimal monetary easing, according to Morgan
Stanley's Currency Research team.

In particular, a report about new quantitative easing from the
Federal Reserve being sterilized--or not expanding the Fed's
balance sheet--as well as repeated concerns from the ECB's Mario
Draghi about short-term inflation risks may signal that central
banks are less and less inclined to engage in potentially
inflationary measures to spur on economic growth.

On one hand, Morgan
Stanley analysts note that this is a result of the positive
effects of previous easing measures:

Our economists believe that the success of the central bank
measures taken so far could well reduce the need for further
action, or at least reduce the extent of measures taken. For the
ECB, the positive impact of the LTRO has reduced tail risks in
Europe, reducing the need for a move towards full QE, and
probably means that the ECB will only have to ease policy more
modestly in the months ahead, our European Economic team
believe.

On the other, it could also pave the way for a global correction:

Given that global central banks are no longer providing
markets with the comfort of clear signals on whether another
round of easing/liquidity measures will be forthcoming, the
emphasis is being put back onto the economic data flow, and here
the news appears to be far more mixed than was the case over the
past couple of months.

There are signs that the global rebound in PMIs is running
out of steam. Our calculation of the G10 Weighted Average
PMI declined
again in February. Also of concern is the evidence that global
trade is slowing down. This was evident in the Australian GDP
data for Q4, where growth was much weaker than expected, with
softness in exports to China cited.

The German factory orders data was also extremely
disappointing, showing a sharp decline for January. Once again
exports lay behind the weakness, with the sharpest decline seen
in non-EMU exports. We would suggest that not only does this
particular data release suggest weakness at the core of
Europe, but is also another warning signal regarding the
sustainability of the global growth outlook.